S&P Flirts With Correction As US Economy At ‘Near Standstill’

It didn’t take long for the incoming data to provide support for a high profile call from one of Wall Street’s most widely-followed names.

Early Monday, Morgan Stanley’s Mike Wilson warned that the market’s focus is likely to shift to a burgeoning growth slowdown and that a deceleration in PMIs could drag US equities another 10% lower.

Hours later, flash reads on IHS Markit’s manufacturing and services sector gauges for the world’s largest economy missed estimates. Although the manufacturing miss was relatively benign (55 versus consensus 56.7), the services print missed by a mile (50.9 versus consensus 55.4).

The figure (below) isn’t pretty. The survey suggested US output slowed to an 18-month low.

“The slowdown in output growth was broad-based, with both manufacturing and service sector firms reporting near-stalled output as the steep spike in virus cases associated with the Omicron wave meant ongoing supply issues and labor shortages were exacerbated by renewed pandemic related containment measures,” the color accompanying the survey said.

The prices charged index on the services side reached an all-time high, at 67. The input prices index fell, both for services and manufacturing, with the latter hitting the lowest since May 2021. “The rate of increase in costs was the slowest since last March, albeit sharper than any prior period in the series history,” IHS Markit noted.

Things are still very much out of sorts, for lack of a more eloquent way to describe the situation. New orders were solid, even as the increase was the weakest in 13 months. Manufacturers reported softer new sales growth, citing inflation, and noted new virus protocols in “key export markets.” Firms were able to hire, but only at a “modest” pace.

IHS Markit Chief Business Economist Chris Williamson did flag some “encouraging signs” amid an otherwise dour read, but he wasn’t shy when it came time to summarize the situation. “Soaring virus cases have brought the US economy to a near standstill at the start of the year,” he said, noting that businesses were hampered by “worsening supply chain delays and staff shortages, with new restrictions to control the spread of Omicron adding to firms’ headwinds.”

Stocks were already on the back foot as geopolitical worries conspired with Fed jitters to undermine risk sentiment coming off the worst week for equities since 2020.

The S&P was 10% below its record highs in early trading Monday, putting the world’s risk asset benchmark par excellence on track to close in correction territory (figure above).

Just ~35% more and Jeremy Grantham will be “right.”